5. How can guaranties be minimized?

Even assuming that the project you are undertaking is a start-up and that your entity does not have a track record, there are definitely ways to minimize guaranties. Some of which you will find palatable and some perhaps not.

  • Add equity to the project. Let's say that what you are providing to the project as equity amounts to a 25% equity contribution toward the total cost of the project. A lender may think that amount is acceptable, but it may not be enough to eliminate the guaranties. If you increase the equity amount to 30% or 35%, you may well have a much greater chance that the lender will limit, if not totally eliminate, your need to provide personal guaranties.
  • A stand-by letter of credit can be a good alternative to cash to improve the risk of repayment. The stand-by letter of credit will come from a bank and will be written in favor of the lender. If the business fails, the lender is guarantied to collect on the proceeds of the letter of credit. You, of course, have to arrange for the letter of credit and pay for it.
  • Collateral assignment of contracts. If there are contracts that your business has for providing certain types of services (mobile MRI, for example) to a hospital or a radiology practice that does not have its own MRI, then the collateral assignment of that contract has value to the lender. If the borrower defaults on the loan, the lender can step into the shoes of the provider or arrange for a new provider to carry out the services under the terms and conditions of that contract. That contract has positive cash-flow implications for the lender, since it is another way for the lender to keep debt repayment dollars flowing to them.

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